Cryptocurrency is an enriching prospect for those who ask the right questions

Cryptocurrency is a viral, groundbreaking technology taking the world by storm. There are those who are wary about cryptocurrency, which is typical when technology is new. Cryptocurrency has been enjoying more and more mainstream adoption in the last year, which is easily quantifiable by looking at the rapid rise in its market capitalization. Despite this increasing adoption enjoyed by the average person, banks and certain governments, such as the U.S. government, have been apprehensive toward cryptocurrency, mainly because they have no control over it due to its decentralized nature.

Much of the resistance to cryptocurrency is based upon misunderstandings of the technology involved. For instance, many claim that bitcoin’s only use is for money laundering. But cryptocurrency is far more susceptible to government tracking than cash, since every transaction is recorded in an open ledger. Cash is much more difficult to trace, but the blockchain is, by definition, a history of every single transfer of bitcoin.

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Exchanges are a different story altogether. Unlike the decentralized cryptocurrencies that are traded on exchanges, cryptocurrency exchanges are centralized entities in a decentralized world. The security that blockchain technology provides is due to its decentralized nature. The centralized exchanges they are traded on are still “traditional” websites that face all of the security issues of running any online business. When millions of dollars in cryptocurrencies are bundled into a few wallets controlled by a centralized authority, they are a prime target for hackers. The bank robbers of the 21st century don’t use masks and guns, they use computers and the internet. Many hacks are due to social engineering, i.e. tricking someone (usually with access the internal controls of the company) into giving up valuable information, such as login information. Therefore, vulnerabilities are not due to the technology, but human error.

There also concerns surrounding unregulated ICOs (initial coin offerings). An ICO is a method of fundraising for a company that does not require the company to release any equity. Instead, they release “utility tokens,” to be used on the platform they are building. This fundraising method has enjoyed increased use due to companies being able to raise funds and not need to release equity in their company in return. These businesses are able to raise funds from a wide range of sources, meaning that they are not burdened with convincing one VC to invest a smaller sum of money. Companies are then able to run a crowdfunding campaign, much like those of Kickstarter, but they are able to give access to their platform at a reduced rate to the contributors, instead of empty promises.

Although ICOs in general are not securities, there are some that can receive that classification, much like a square is a rectangle but a rectangle is not necessarily a square. This is not because of the release of tokens in exchange for Ethereum, but because of the utility of the tokens, or lack thereof, and what the tokens give you in exchange. In some instances, the tokens give you voting rights in the company, hence it is a security — like in the case of the DAO, one of the first ICOs, which ultimately failed due to a bug in its smart contract which allowed someone to withdraw funds without permission. In fact, the U.S. SEC released a report stating that the DAO was a security, but that not all ICOs are. In others, they offer no value whatsoever apart from their price (and potential appreciation); again, definitely a security. Other times they are promoted by saying they will go up in value; once again, a security.

When considering participation in an ICO, potential investors must do their due diligence. The most important criterion is the bona fides of the founding team and their credentials in the cryptocurrency community. Although the blockchain is a trustless means of distributing consensus, trust remains an important part of the ICO process. Questions prospective token buyers should ask include:

How sound is the project’s logic and roadmap as outlined in their white paper?

How likely is the team to be able to execute on that roadmap, in light of their past successes and their core competencies?

Why does the project need a token, and what will the utility of the token be?

How much are they trying to raise? Why do they need this amount of money and how will they spend it effectively?

Are there other similar projects, and if so, what gives this project a competitive advantage?

In short, bitcoin and its many derivatives are a promising and rapidly growing field of technology. The hype exists for a reason: cryptocurrency has the potential to forever change how we do business. An intelligent investor who does their due diligence and can stomach the volatility has a rare opportunity on their hands: the chance to be part of the beginning of a global transformation of money.

Nick Spanos (@NickSpanos) is the co-creator of the Zap Project, which is working to provide an open marketplace for the blockchain industry.